Congressional Report Presses USF E-Rate Reforms

Telecom Policy Report, Oct 24, 2005

While its conclusions about "waste, fraud and abuse" in the Universal Service Fund's current education rate (E-rate) mechanism for funding school and library Internet access certainly can't surprise anyone, last week's report from the House of Representatives on management problems and possible fixes will likely weigh heavily on efforts by the Federal Communications Commission to reform the subsidy's oversight.

In a 52-page report that followed a year-long investigation and five public hearings, the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations detailed findings on financial scandals and lax administration within the embattled E-rate process plus it identified a number of reforms the legislators believe are needed to repair what was called "broken system."

The lawmakers approved a bipartisan staff report that clearly focused on the capabilities of the FCC-established third-party Universal Service Administrative Company (USAC). The independent, nonprofit organization has disbursed more than $30 billion from the USF program since taking over the supervision in 1997, including about $2.5 billion in annual E-rate funds.

As part of its assessment, the report said E-rate - a USF expansion codified in the Telecommunications Act of 1996 - is "a well-intentioned program that nonetheless is extremely vulnerable to waste, fraud, and abuse; is poorly managed by the FCC; and completely lacks tangible measures of either effectiveness or impact." The report's findings ticked off the following negative points:

* The FCC's three key oversight mechanisms for E-rate - rulemaking procedures, beneficiary audits and reviews of USAC decisions via appeals decisions - are insufficient.

* Some school districts have acquired goods and services through E-rate without using a formal bidding process, contrary to both the program's rules and local regulations.

* There is no real protection from "gold-plating" - procuring technology goods and services far beyond reasonable school district needs and resources.

* Weak competition requirements and inadequate oversight allowed a group of vendors to completely manipulate the competitive process for E-rate goods and services, without USAC detecting the fraud.

* Guidelines for measures against vendors and applicants set standards of program abuse too high, requiring first a civil judgment or criminal conviction against participants before suspensions may occur and debarments can be considered.

* E-rate's ambiguous rules, procedures and extensive delays in funding distribution create significant confusion among applicants and vendors, contributing to program waste.

The report clearly underscored about two years of law-enforcement inquiries into the multi-million-dollar scandals - including indictable offenses - that have hit the E-rate activities in the United States and Puerto Rico; the U.S. Department of Justice (DoJ) had even created an E-rate program task force.

USF and E-rate also have been the focus of critical assessments by the Government Accountability Office (GAO) and the Office of Management and Budget (OMB) plus the FCC is involved in a broad inquiry into the management, administration and oversight of USF and USAC (TPR, June 20).

Some Suggested Fixes

Suggestions that USF be funded from general tax revenues have not been politically popular, and there strong small/rural telco lobbying groups as well as business and consumer advocacy organizations firmly behind the program. There are also federal legislative proposals in the House and Senate to expand USF to include broadband.

Nevertheless, the House report maintained there are some key principles that should guide USF program and E-rate reform; these items - which could make their way into a new modus operandi emerging from the FCC effort or within pending telecom law rewrites in Congress - include:

* More rigorous oversight by the FCC and USAC, which may require additional personnel resources (Editor's note: regulatory officers such as the FCC Inspector General have told legislators about the need for more people on a regular basis).

* Auditing must be undertaken immediately and accomplished before the end of this Congress so that the FCC can promptly provide to lawmakers some tangible measure of the extent and scope of program waste, fraud and abuse.

* Concrete and achievable goals and measures of effectiveness.

* A mechanism to root out "gold-plating."

* Apply federal accountability requirements to E-rate (this could impact efforts to exempt USF and E-rate from the stringent Anti-deficiency Act that governs federal accounting and expenditure book keeping).

* Reduce the backlog of appeals, which can take years to resolve.

* Require school districts to take a greater financial stake in their E- rate applications.

* Implement a robust, transparent competitive bidding structure.

The report described E-rate incidents of waste, fraud and abuse in various parts of the United States but a House committee public statement characterized the Puerto Rico record as "one of the most infamous cases." USAC allegedly disbursed $101.2 million from 1998 to 2001 to equip 1,540 Puerto Rican schools with high-speed Internet access, but a later review found few computers connected to the Internet and $23 million in equipment sitting in unopened boxes in a warehouse.